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30 August 2012

Should the SEC have Played a Role in Conflict Minerals?

Steven Davidoff argues that the SEC overreached by being involved in the decision regarding Dodd-Frank Section 1502 (aka the ban on conflict minerals). He explains in the NY Times Dealbook:

But even beyond their expense and complexity, the real question is whether these rules are appropriate. Transparency and disclosure appeal to everyone. Who can argue with companies being more transparent?

But disclosure can have perverse effects. In the case of executive compensation, more disclosure likely allowed executives to know what others were paid and demand higher pay for themselves.

In this case, disclosure may impose substantial costs on companies without corresponding benefit.

Along these lines, an S.E.C. commissioner, Troy A. Paredes, wrote that he voted against the rules because they failed to assess “whether and, if so, the extent to which the final rule will in fact advance its humanitarian goal as opposed to unintentionally making matters worse.”

The problems could be manifold. These new rules could lead to manufacturers simply refusing to buy any of these minerals from Congo and surrounding area. This would be a de facto boycott that could harm the populace more than it would help. The rules could also have little benefit as smugglers simply circumvent them.

Or the new rules could allow foreign companies to step in and buy these minerals at a lower cost, hurting American businesses while doing nothing to stop the fighting. As the S.E.C. has acknowledged, these rules “may provide significant advantage to foreign companies that are not reporting in the United States.”

There are already companies waiting to profit. The Enough Project rates manufacturers for their diligence in auditing their supply chains to exclude conflict minerals. The bottom 10 on the Enough Project’s list are all Asian companies, for whom these rules are not likely to apply.

So the rules effectively apply only to public companies listed in the United States. This could be a deterrent to foreign manufacturers listing in the United States or even to American companies remaining public.

And finally, these are only disclosure rules. Companies may simply ignore the embarrassing effect of disclosure, as they do the rules regarding disclosure of executive compensation.

Davidoff admits that the ruls may be worth it quoting a statement from Darren Fenwick of the Enough Project that profits are down in the trade of conflict minerals. However, he concludes that the issue was one that should not have fallen under the guise of the SEC.

According to the law firm Davis Polk, as of July 30, the S.E.C. has missed the deadline to complete 52 rules under the Dodd-Frank Act.

The agency could certainly use the time it will devote to conflict minerals to catch up with reforming the financial system. In such circumstance, the better route is to have the State Department promulgate more general rules that deal with the issue and apply to all companies.

Instead, we have not only a capital markets regulator but a foreign-policy maker in the offing.

All of this further complicates the problem as it does not address the issue at hand. if the Camber of Commerce does sue the SEC for the ruling and win, what will be the lessons learned? Will it be based on concerns about the legislation itself? Or will it be about the way that it was included in a comprehensive act?

Thoughts from the crowd? My read is that this is by no means over, but I have a hard time getting at how it will play out.